Tuesday, April 21, 2015

Analysis of Bayer 2015

Business: A German life science company. They stand on three pillars at the moment: HealthCare, CropScience and MaterialScience. However it is their plan to float the MaterialScience on the stock market during 2015 which then becomes an 11 billion € revenue chemical company.

Active: Present world wide with heaviest focus in Europe and North America.

The P/E of Bayer is horribly high with 32.2 and the P/B is equally bad with 5.5 which gives a very clear no go from Graham. The earnings to sales are, looking at it as a chemical company, ok with 8% and the ROE is fully acceptable with 17%. The book to debt ratio is so, so with 0.4.
In the last five years they have had a yearly revenue growth of 3.8% which if good and this then gives us a motivated P/E of 12 to 16 which means that Bayer is highly overvalued by the market today.
They spend a very large amount of research since it is up over 100% of their earnings so that should probably be decreased a little if they do not manage to get more out of it anyway...
They pay a silly dividend of 1.7% which correspond of almost 55% of their earnings so they better start making more money and soon!
As a comment here. It is obvious that they are selling off their MaterialScience part at a moment when they will probably get a lot of money for it but also at a moment when it could have generated much higher earnings due to the decreased oil price. Personally I like conglomerates that try to even out their earnings by having different cyclical parts and I have never respected the analysts that always wants to have pure businesses, which comes more from (A) their incompetence to make a valuation as well as (B) their hope to make a quick buck in a good year for the cyclical company than anything else and I see no reason for why any serious management team should fall for such idiotic reasons.

Conclusion: Both Graham and I find Bayer to be highly overvalued today and it is a clear no go! By the look of it the gold diggers have gathered around and pushed up the share price to, in my opinion, unacceptable levels. Neither the Life Science (with CropScience and HealthCare) part nor the MaterialScience part should be anywhere close to a P/E of 32 and if you claim that the MaterialScience is less and I can accept that then the HealthCare AND CropScience (what you value that at?) should still not be traded well above a P/E of 32. I do not buy that reasoning! Overvalued and a clear no go is the only thing to say about Bayer.